“We’re in a different spot than most everyone in this room who has a [language service] business,” acknowledged Ron Kuehl, Managing Director at Frontenac to the 80 senior language industry executives gather at SlatorCon New York on October 12, 2017. “But we’re choosing to join hopefully this elite group,” he continued as he shared his perspective on the language industry and why his firm is looking to invest in the industry.

The Chicago-based private equity firm focuses on the mid-market and has invested over USD 1.5bn since its inception, resulting in over 200 partnerships with founder-owned and entrepreneurial businesses across the consumer, industrial and services sectors. “We’ve had the good fortune of partnerships with many stellar people that have built their businesses over a series of decades,” said Kuehl.

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The key to Frontenac’s success may be its top-down approach and trademarked “CEO1ST” methodology, which Kuehl shared with the audience. “The key elements,” advised Kuehl “are one, the incumbent leadership team, the team that is in the business today, and two, the outside executive talent that we will help to recruit to supplement that existing team. But the essence of this is that we lead with the management side of the business.”

Watch Ron Kuehl discuss what Frontenac is looking for in the language services industry and how M&A can help drive growth for small and medium-sized firms.

It Begins with an Investment Thesis

Within the current steady economic growth and buoyant M&A and public equity markets, Frontenac has money to put to work. However, Frontenac begins with a market-first approach, unlike some investment groups, which start with a deal and then work backwards to understand the industry and opportunity.

“Typically, and language services is no different, it’s about good people, it’s about solid execution and it’s about a client experience that is differentiated and accommodating.”

“Over the course of any given year,” shared Kuehl, “we evaluate over a hundred different industries, market segments, investment thesis ideas. This [language services] is one that we have found compelling.” Kuehl would later list his specific reasons including:

Language services is a growth market where globalization is a key driver that will continue at a high rate;

It’s an important service where the cost of failure or mistake can be critical, particularly in highly regulated industries like life sciences;

There are numerous end-markets and various service offerings providing multiple attractive entry points for Frontenac as a new investor; and

Frontenac has now developed a detailed investment thesis for language services, with a long-term strategic growth plan, technical steps to achieve a successful outcome, and people central to their investment plan.

“Rarely are we buying the best widget manufacturer or some IP-protected business,” said Kuehl as he shared a sampling of current investments. “Typically, and language services is no different, it’s about good people, it’s about solid execution and it’s about a client experience that is differentiated and accommodating.”

The CEO1st Approach

Frontenac works with a CEO1ST partner throughout the process from investment thesis development through eventual liquidity. For language services, they are working with Perry Solomon, who has two decades of CEO experience, worked with multiple private equity firms during that time and deployed multiple playbooks in different industries, including language services.

Ideally, Frontenac is looking for a language service provider (LSP) of reasonable size with a differentiated business model, sufficient immediate infrastructure, and stable and growing cash flows. “Revenue matters,” advised Kuehl “but for most of us [in private equity], it is about cash flow and I think about stability of cash flow and growth of cash flow. Those are two meaningful ways to think about a business. The best businesses have both stability and growth of cash flow.”

“Revenue matters but for most of us [in private equity], it is about cash flow and I think about stability of cash flow and growth of cash flow”

In terms of overall attractiveness, size, cash flow momentum, uniqueness, diversity, lack of business concentration, and existing management commitment all matter to Frontenac. Once a company is identified, Frontenac, the CEO1ST partner, and incumbent management get together to brainstorm how best to drive value creation going forward.

It’s a highly flexible approach with the existing management team central to the process. “They know the business best,” said Kuehl. “They know the industry and oftentimes are sitting on latent ideas that haven’t been executed on yet for one reason or another.” Frontenac marries this with CEO1ST executive, who has industry knowledge and can bring some new and unique ways of operating.

How that works depends on the business. “Perry could be a board member, a chairman, an executive,’ added Kuehl. “What are the needs are of the company and the desires of the ownership and of the management team?”

Frontenac also make use of outside advisors who are specialists in functional areas and can add value in discrete parts of the business like sales compensation models or reducing working capital.

M&A is Case Specific

In concluding his overview of their investment approach, Kuehl summarized that they are looking to ride the industry’s growth, help a successful LSP expand and diversify its business, and utilize acquisitions to further support growth.

“It’s specific to the strategy and what the objectives are and what opportunity exist in the marketplace,” advised Kuehl. “Yet with 20,000 different players in language services, it likely makes sense to do at least a couple of acquisitions during the course of a five- or 10-year period.”

For LSPs looking for growth capital, Kuehl advised reassuringly, “If you build your business smartly and build it right, invest in people, don’t cut corners and build for the long term, you’ll be highly sought after and you’ll have a business that many different people want and want at a premium valuation.”